Taxpayer paid 65.5p, currently trading 55p. Loss of £2 billion on the first day the taxpayer became the majority shareholder. It is only money…

Bankruptcy was not entirely unexpected in the case of these two ailing retailers. Despite Mandelson pleading with Woolies’ bankers into the early hours of this morning they pulled the plug regardless. Tuppence off prices won’t make much difference for them.

Keen readers will notice the change to the portfolio on the right hand side for the first time in a month. Guido has just shorted FTSE futures and Dow futures. Combination of bad local news and a sense that there is a mood of bailout fatigue in the U.S. There is usually a “Santa Claus rally” in the markets at year end. Not sure Santa is going to come this year…

Jack Thurston, a former special adviser to Gordon’s enforcer Nick Brown, and one of early New Labour’s more cerebral types, writes in this morning’s Wall Street Journal of the perils of “A Permanent Bailout“. Even a perennial optimist like Guido wonders if we are finally seeing the the delayed end of the twentieth century era of Anglo-American global dominance as predicted by the CIA. The economies of the U.K. and the U.S.A. are being burdened with government debts of epic proportions, our children (and their children as well) will be indentured tax slaves.

Hyperbole? The government bond markets will enslave the citizens and subjects who pay the taxes that service their demands as surely as feudal barons demanded their lands were ploughed for their table by serfs. It is stunning that Brown’s policies have cost HM Treasury, in real terms, more than it took to defeat the Luftwaffe and the Wehrmacht. The debt obligations of the state will be £2 trillion within a few years, Gordon ignores the unfunded pensions of his bloated public sector bureaucracy and admits to “only” £1 trillion. The long term consequences of a debt burden as great as this are that Britain will have a permanently low growth economy. If, as is most likely, predominantly foreign investors hold government bonds, higher taxes will reduce the available capital which can be put to productive use in the domestic economy because the interest paid is exported. That is if they are not too worried about Britain going bust to invest at all. The chart above (click to enlarge) shows the cost of insuring in the credit default swap market against the U.K. government going bust is nearly triple the German rate. British Gilts are becoming the junk bonds of the G7.

Do people want to live in a country designed by Gordon Brown, as cheered on this morning by Polly Toynbee, Will Hutton and Roy Hattersley? Is there a prospect on the horizon of a radical government which can arrest the inevitable decline? Is there a Thatcher-like political leader who can turn around the super-taxer-tanker of state? Guido suspects a lot of internationally mobile people will be weighing up the prospects and possibly heading for the exits soon.

UPDATE : From The Times this morning; “In recent years, thousands of educated Australians have come to the UK. Immigration has been the start of a career, not a gap year, it adds. So there should be some alarm at the fact that they are heading back home in ever larger numbers: 2,700 a month compared to 1,750 a month in 2005. This is largely a vote of no confidence in the old country.”

Australia runs a budget surplus, has paid down the national debt in the good years and welcomes skilled migrants. Form an orderly queue.

The return of socialism to British shores and the expropriation under terror laws of Icelandic assets has unnerved some foreign investors. The problem with the government doing things out of expediency in pursuit of headlines is that the actions are remembered long after the headlines have faded. “If it can happen to Iceland it can happen to us” some of the huge sovereign wealth funds will be thinking. Trust is key to successful markets, would you risk trusting this government?

Elsewhere fund managers are seeking a quick resolution of Lehmans bankruptcy issues, billions remain frozen in accounts resulting in margin calls on fund managers unable to retrieve securities from the Lehmans administrator – making them forced sellers and an extra downward pressure on London’s markets. The FSA or the Bank of England needs to untangle this mess urgently. Unfortunately it is unclear who has responsibility under Gordon’s regulatory regime.

City law firms are dusting off old legal tomes from the seventies on sovereign defaults – when countries go into bankruptcy – Iceland is on the edge. What will surprise many is that Italy is the second candidate for bankruptcy. How will the Euro survive a member country’s financial collapse? Italy has cooked the books since before even joining the euro. Bond markets know it, the wide spread between Italian government bonds and German government bonds shows that many believe that European unity will not include the Bundesbank standing behind Italian Buoni del. Tesoro Pluriennali. If Italy fails what happens to the European project?

The unwinding of Lehman’s credit default swaps appears to be going well. Market nervousness about systemic risk was said to be at the heart of banks hoarding cash, no financial detonations have been reported. Market authorities reckon the net losses could be as low as $6 billion. Hardly anything…

How is that Lloyds, a seemingly well run and conservatively managed bank, has in the space of few weeks gone from being solid and unexposed to the U.S. mortgage market to being nationalised by the government? One wonders if the chairman now regrets meeting Jonah Brown at that party…

Trevor Kavanagh this morning points out that the collapse of Britain’s banks was not inevitable, “it hasn’t happened in Canada, Australia or Sweden”. So much for Britain being uniquely placed to weather the financial storm. Gordon designed the regulatory system, Gordon allowed the property bubble to inflate. Gordon’s bubble has now popped.

Gordon is spinning that he is leading the world, either he is delusional or deliberately lying, in Europe they are calling the EU-wide rescue plan the “Sarkozy solution”. If any country can honestly claim leadership, it is actually Sweden, the EU plan being based on a nineties solution to a Swedish banking crisis. Gordon, for some reason, needs us to believe he is saving the world.

Toynbee has now realised that Gordon is staying and that her flirtation with David Miliband was just a passing fancy. Her tune has changed, now saying (once again) that Brown is the man for our times when only weeks ago she was telling the cabinet they were spineless not to get rid of him. Laughable.

Polly’s advice and economic genius is as suspect and as reliable as her loyalty to whichever politician she is championing this month. At the beginning of the year she was still loyal to Gordon and chiding Cameron for his new year message which she claimed

smacks of callow point-scoring, with his five repetitions of “Labour’s hopeless” – and it will look even thinner in retrospect in a year’s time if Brown has steered through economic rapids without most voters feeling any adverse effect.

She was confidently predicting

A minor slowdown with neither inflation* nor unemployment rising will see Brown’s old “no boom or bust” boasts triumph this time next year.

Guido suggests we leave Polly and Will to their studio soundbites and ignore their siren voices – they have been advocating their brand of redistributive social democracy as the solution to everything for decades. If policy makers are looking for guidance on avoiding a depression (alas a recession is upon us already) they should dust off the works of Ludwig von Mises and Milton Friedman – Mises wrote the seminal “The Theory of Money and Credit“. If this book had been read by more central bankers outside the Bundesbank we would not be in this mess. Guido once listened to an LSE lecture by a Bundesbank board member speaking in reverential tones about Mises’ thinking. He is the high priest of monetary theory.

If history is not to repeat itself then reading Friedman’s “The Great Contraction, 1929-1933” should be a priority. If you think this is irrelevant to the state we are in you should note that the current Federal Reserve chairman, Ben Bernanke, pays tribute to this work and is quoted in the introduction to the current edition. Whereas Mises is heavy going, Friedman and Schwartz are essential reading.

Guido can summarise the primary policy response to the situation we are in succintly : cut interest rates, to lessen the pain of the inevitable reckoning.

If you think it is bad now, imagine what it will be like if the reckoning for Lehman’s Credit Default Swaps goes bad today. Many market players think this is the reason banks are hoarding cash, because no one really knows if these derivatives will settle without serious mishap.

Lehman’s bonds are trading at 13c on the dollar – and there is $128 billion in bonds outstanding. The banking system is looking at booking a $100 billion hit today. There are an estimated 350 counterparties and nearly 2000 related securities.

Guido thinks that Greenspan could have been right on this, the risk has been distributed, it will hurt, hopefully only just wounds rather than causing major fatalities. If it goes smoothly we could be looking at a monster relief rally… but it is still a bear market…